The scope of work on this potential deal will be cosmetic and systems - such as interior & exterior paint, new plumbing, electrical, kitchen cabinets, some windows, refinishing wood floors and maaaaaybe a new roof.

I'm not sure how to handle negotiations with him.2) To complicate matters, before he moved in I tore out the kitchen cabinets and installed brand new cabinets and brand new granite counters.

It mostly needs updates (flooring, paint, kitchen cabinets), no major rehab. 

He is also a cabinet guy so I think i'll be offering him the opportunity to finish some work on the house too...he did build out the kitchen himself, used to work for my father in law, and does good work.

Such as cabinets size and quality, Granite selection, etc. 2.

The kitchen looks perfectly clean and functional, but the cabinets and countertop would look a little outdated in my mid-Atlantic market (Baltimore-Washington area).

Worth just doing it rather than painting or something like that.In that kitchen fireplace, assuming it is entirely non-operational, I have seen some with cabinets built into them that look quite nice, and if your budget extends to a large stand-alone range, that is the perfect spot for it.

In the next few months I plan on updating my kitchen by refacing my cabinets, putting in a new countertop, and buying new appliances (need to install dishwasher as there is currently not one).  

Got it as an REO, previous owner did all the demo for me, took all doors, light fixtures, appliances, cabinets/counters and the furnace with him.

You can always go down but not always up unless zoned.MOST are converted back by knocking out blocked off door or stairway if they have outside treacherous steps,,demo those too,,and demo crappy cabinets upstairs.most of these are so bad of shape nobody wants to rent them anyhow,,,or landlord paid utilities exceed market rent anyway.they all go to rent subsidized ground floor apartments,,nicer and cheaper